Read to Learn Explain one major difference between credit cards, installment loans, and mortgages. Indicate at least three ways to maintain a good credit rating.

The Main Idea There are several similarities between credit cards, installment loans, and mortgages. There are also differences. Keeping a good credit rating is important if the consumer is interested in getting loans at a reasonable cost.

Key Concepts Understanding Loans and Mortgages Keeping a Healthy Credit Record

Key Terms variable rate an interest rate that fluctuates or changes over the life of the loan fixed rate an interest rate that stays the same over the life of the loan

Key Terms a portion of the total cost that is paid when a product or service is purchased down payment the amount of borrowed money that is still owed and on which interest is based principal

Key Terms finance charge the total amount it costs the borrower to have the lender finance a loan secured loan a loan that is backed by collateral

Key Terms unsecured loan a loan that is not backed by collateral a court order to take all or part of a debtor’s paycheck if he or she stops making payments garnishment of wages

Key Terms repossess taking back an item

Understanding Loans and Mortgages Loans and mortgages allow consumers to borrow money that will be paid back with interest.

How Installment Loans and Mortgages Work A loan is money lent by one party to another with interest, usually requiring collateral. A mortgage is a loan agreement secured by property, usually the item that the mortgage is for, such as a home.

How Installment Loans and Mortgages Work Installment or mortgage loans can have a variable rate of interest or a fixed rate of interest. variable rate an interest rate that fluctuates or changes over the life of the loan fixed rate an interest rate that stays the same over the life of the loan

How Installment Loans and Mortgages Work Installment and mortgage loans usually require the applicant to give a down payment. down payment a portion of the total cost that is paid when a product or service is purchased

How Installment Loans and Mortgages Work On a simple interest loan, interest is based on the original principal alone. principal the amount of borrowed money that is still owed and on which interest is based

How Installment Loans and Mortgages Work A finance charge includes the interest and any other charges, such as the application fee. finance charge the total amount it costs the borrower to have the lender finance the loan

How Installment Loans and Mortgages Work A mortgage is an example of a secured loan. A credit card debt is an example of an unsecured loan. secured loan a loan that is backed by collateral unsecured loan a loan that is not backed by collateral

How Installment Loans and Mortgages Work Secured loans usually carry a lower interest rate.

Keeping a Healthy Credit Record To continue using credit or to get new credit, you need to maintain a good credit rating score. To get the best credit rating, you need to pay your bills on time.

Factors That Affect Your Credit Score Figure 26.1 Factors That Affect Your Credit Score

Staying Within Your Income Limits Experts say consumers should not use more than 20 percent of their income for credit payments.

Graphic Organizer No Remember Your Income $2,000 per month $1,500 after taxes Your Debt $120 for Student Loans $160 for Car Payments What You Want A new entertainment center for $50 per month for three years Can You Afford It? No You should not use more than 20 percent of your income for credit payments. Remember Your total payments each month would be $330, or 22 percent of your take-home pay.

Signs of Credit Trouble Graphic Organizer Signs of Credit Trouble You cannot make monthly loan payments and minimum monthly payments on your credit cards. You receive second and third payment-due notices. You get calls from bill collectors.

Signs of Credit Trouble Another sign of credit trouble is when a creditor arranges a garnishment of wages. garnishment of wages a court order take all or part of a debtor’s paycheck if he or she stops making payments

Signs of Credit Trouble Another sign of credit trouble is when a creditor is forced to repossess an item you purchased. repossess taking back an item

Which type of loan usually carries a lower interest rate—a secured loan or an unsecured loan? a secured loan because it is backed by collateral and, therefore, involves less risk

What is the maximum percentage of your income that you should allocate to credit payments?

What is a garnishment of wages? a court-ordered act of taking back all or part of a debtor’s paycheck if payments are stopped

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